- Written By Sheena Zimmermann, M.Ed.
Sheena Zimmermann, M.Ed.
As a professional who values lifelong learning, Sheena Zimmermann joined the Annuity.org team with a deep commitment to connecting readers with resources designed to improve their financial literacy and strengthen their financial health.Read More
- Edited ByKim Borwick
Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.Read More
- Financially Reviewed ByThomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
- Updated: December 22, 2022
- 6 min read time
- This page features 3 Cited Research Articles
Banking, accounting and other financial sectors use basis points to express interest rate changes and rate spreads. These industries often refer to basis points as “bps” or “bips.”
Basis points are useful when discussing interest rates and other percentages, such as the cost of annuity riders or administrative fees, of less than 1%.
Why Use Basis Points Instead of Percentages?
Basis points are convenient and steady. Basis points are less ambiguous than percentages as they represent an absolute, set figure instead of a ratio.
For example, a 1% increase on a 5% interest rate could be interpreted as either 5.05% or 6%.
Conversely, if the rate increases by 100 basis points, the result is constant. The rate updates to 6%. Likewise, an increase of one basis point would only increase the rate to 5.01%.
Price Value of a Basis Point (PVPB)
One basis point equals 0.01% or 0.0001.
You can use a calculator or simple arithmetic to convert basis points to a percentage and, likewise, percentages to basis points.
How Do Annuity Providers Use Basis Points?
Annuity providers use basis points to denote incremental annuity rate changes. They also use basis points to express the difference between two interest rates. When calculating the interest that should be credited to an indexed annuity with a rate spread, annuity issuers use basis points to determine the change in the index and subtract the spread.
Basis points also reflect annuity fees, and they serve as an important consideration when comparing annuity products. Charges such as agent commissions, administrative fees, surrender charges and mortality expenses are often listed in basis points in initial contracts. Understanding basis points can help consumers quantify or calculate the financial impacts of these fees.
How Do Investors Use Basis Points?
Investors use basis points to convey the costs of mutual funds and other exchange traded funds.
Basis points impact a myriad of financial instruments, including treasury bonds, corporate bonds, common stocks and mortgage loans.
Investors also apply basis points as a consistent means to compare expenses and certain funds’ fees. Basis points can express an asset’s change in value. Prevailing interest rate adjustments, even by one mere basis point, can have a significant impact on bonds and other investments.
These basis points, although they represent only one one-hundredth of a percentage point, can have big dollar implications for institutions and individuals.Please seek the advice of a qualified professional before making financial decisions.Last Modified: December 22, 2022
3 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Corporate Finance Institute. (n.d.). Basis Points (BPS). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/basis-points-bps-definition/
- Lewis, J. (n.d.) What Does Accounting Basis Points Mean? Retrieved from https://smallbusiness.chron.com/accounting-basis-points-mean-38158.html
- Omni Calculator. (2022, March 17). Basis Point Calculator. Retrieved from https://www.omnicalculator.com/finance/basis-point
- Edited By
Calling this number connects you to Senior Market Sales (SMS), a trusted partner of Annuity.org.
If you're interested in buying an annuity, a representative will provide you with a free, no-obligation quote.
SMS is committed to excellent customer service. The company can help you find the right insurance agent for your unique financial objectives.877-918-7024